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Edited Transcript of PKY.N earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Parkway Inc Earnings Call

Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Parkway Inc earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Noni Holmes-Kidd

Parkway Inc. - VP and General Counsel

* Jason Bates

Parkway Inc - EVP & CIO

* Jim Heistand

Parkway Inc. - President & CEO

* Jayson Lipsey

Parkway Inc - EVP & COO

* Scott Francis

Parkway Inc - EVP & CFO

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Conference Call Participants

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* Dave Rodgers

Baird - Analyst

* Alexander Goldfarb

Sandler O'Neill - Analyst

* Tom Lesnick

Capital One. - Analyst

* Rich Anderson

Mizuho Securities - Analyst

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Presentation

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Operator [1]

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Good day everyone and welcome to the Parkway Fourth Quarter 2016 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Noni Holmes-Kidd, Parkway's Vice President and General Counsel. Please go ahead.

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Noni Holmes-Kidd, Parkway Inc. - VP and General Counsel [2]

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Good morning, and welcome to Parkway's fourth quarter 2016 earnings call. With me today are Jim Heistand, President and Chief Executive Officer; Scott Francis, Chief Financial Officer and Chief Accounting officer; Jayson Lipsey, Chief Operating Officer; and Jason Bates, Chief Investment Officer.

Before we begin, I would like to direct you to our website at pky.com, where you can download our fourth quarter earnings press release and supplemental information package. The earnings release and the supplemental package both include a reconciliation of non-GAAP financial measures that will be discussed today to their most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the Company's expectations are forward-looking statements within the meaning of the Federal Securities Laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Please see the forward-looking statement disclaimer in Parkway's fourth quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

With that, I will now turn the call over to Jim.

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Jim Heistand, Parkway Inc. - President & CEO [3]

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Good morning, and thank you for joining us today. Before getting started on our fourth quarter update, I'd like to thank all of those that made the trip to Houston in January to attend our Investor Day. It was a great turnout and we were thrilled to be able to showcase the quality of our portfolio, provide a detailed overview of the Houston market and discuss Parkway's strategy going forward.

In early October last year, we successfully completed the merger and spin-off from Cousins, a transaction we believe created significant value for all our shareholders. As a result Parkway has become the largest Class A office landlord in Houston, assembling a portfolio of five assets totaling 8.7 million square feet located in attractive submarkets.

As we discussed in Investor Day the Houston market has been significantly impacted by depressed oil prices over the past 2.5 years. We've seen a continuation of weakening office fundamentals, including declining rents, increased vacancy and significant additions of sublease availability. With that said, the Houston economy had historically remained resilient and we continue to see diversification of its industry base beyond traditional oil and gas industries.

While I'm seeing early signs of oil market stabilization, we continue to expect this will be a multi-year recovery and then we will likely witness further softening before any material improvement in commercial real estate fundamentals. Despite the current headwinds we're facing in the market, we believe we have the right team in place to execute our strategies and we have the right portfolio of assets that we believe will outperform the overall market in both up and down cycles. We're committed to taking a proactive approach to asset management, identifying revenue, enhancing capital projects that will enable us to upgrade asset quality, retaining existing customers and attracting new customers at favorable economics. We also intend to be opportunistic in our approach to executing on an investment opportunity of high-quality assets located in our core submarkets.

Lastly, we're executing a financing strategy that enabled us to be flexible and positioned us for future growth while maintaining low leverage and a conservative balance sheet. It was just under four months since the Cousins transaction and we have already made considerable progress on our near-term strategies.

At the end of last week, we announced an agreement to sell a 49% interest in Greenway Plaza and Phoenix Tower for a gross value of $1.045 billion or $210 per square foot. This investment by high-quality institutional investors for the validation of a thesis that we have supported for some time now. In fact, Houston is a very large and diverse economy with demographic trends that we expect will support an eventual recovery in office market fundamentals. Additionally, the joint venture allows us to mitigate risk in assets that represent 57% of our portfolio, while maintaining a position to participate in the long-term upside. And lastly, this transaction will result in approximately $316 million in net proceeds to Parkway, increasing our pro forma cash balance to over $500 million.

The joint venture proceeds will enable us to immediately strengthen our balance sheet while giving us additional capital to pursue attractive acquisition opportunities as the Houston market recovers. As we said previously, the cash we received from the spin-off was intended to be used for repositioning of the existing assets, leasing of current vacancy and to protect ourselves from further deterioration of market fundamentals. The additional liquidity we expect to receive from the joint venture transaction will provide us with the flexibility to pursue assets when the time is right.

Looking ahead, we will continue to navigate near-term market challenges focusing on generating positive net absorption to market rates, managing risks associated with limited near-term lease expirations and prudently allocating capital to reposition the existing assets while capitalizing on acquisition opportunities. If we are successful, we will continue to execute our stated strategy. I believe we will be able to unlock additional value for shareholders that is embedded in this portfolio.

I'll now turn the call over to Jason Bates for an update on our investment activity.

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Jason Bates, Parkway Inc - EVP & CIO [4]

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Thanks, Jim. Last Friday, we reached an agreement to sell a 49% interest in Greenway Plaza and Phoenix Tower, collectively known as the Greenway Portfolio, for a gross asset value of $1.045 billion or $210 per square foot. We are forming a joint venture with TH Real Estate, who is a affiliate of TIAA, and has been advised by and partnering with Silverpeak and the Canada Pension Plan Investment Board. As part of the agreement, Parkway will retaining a 51% ownership, the partnership between TH Real Estate and Silverpeak will acquiring a 24.5% ownership, and CPPIB will acquiring a 24.5% ownership. Parkway will be the general partner and will also provide property management, leasing and construction management services for the joint venture.

As part of the closing, the joint venture expects to assume the existing $76.2 million mortgage debt secured by Phoenix Tower, which matures on March 1, 2023. Additionally, we received a commitment from Goldman Sachs for a new five year mortgage loan totaling $465 million with a fixed interest rate of 3.75%, that will be secured by the remaining Greenway Portfolio assets. Upon completion of this transaction, we intent to use proceeds that terminate our existing revolver and term loan credit facility that has an outstanding balance of $350 million. We expect the joint venture and associated financing to close concurrently early in the second quarter of 2017, subject to customary closing conditions.

We believe this transaction accomplishes a number of key strategic objectives. First, at a gross price of $210 per square foot, we believe we've achieved appropriate pricing for these assets that is both reflective of the current Houston market and is in line with our internal portfolio valuation for these assets. The sale represents a full-year cash cap rate of approximately 8.1% with the portfolio 89% leased as of year-end 2016.

Second, the JV represents a meaningful investment by sophisticated institutional investors that share our view with the long-term prospects of the Houston economy and office market. We are excited to establish this important partnership and lead the execution of an asset management and leasing strategy that we believe will unlock long-term value for all investors.

Third, the transaction helps mitigate risk associated with only a single office campus that represents 57% of Parkway's portfolio total square footage. We are diversifying our risk, while maintaining a significant position in the asset which we believe will position us to benefit from the eventual rebound in market fundamentals.

Lastly, we expect net proceeds for Parkway of approximately $316 million, which includes the new debt placement and the assumed payoff of our $350 million existing term loan. These net proceeds will also be net of a credit we are making to the other JV partners for outstanding contractual lease obligations, including tenant improvements, lease commissions and rent concessions as well as certain capital projects that are in process, all of which total approximately $38 million as of the date of execution.

Please note that approximately $28 million of this credit is related to carryover tenant improvement obligations for previously signed leases, the majority of which were signed prior to the merger and spin-off from Cousins. This credit also includes approximately $5 million for capital projects that are already in process. The majority of the cost for our capital improvement plans for the Greenway Campus will be shared by the joint venture as our partners are in support of the repositioning plans we have previously discussed. This joint venture enables Parkway to receive capital that will initially be used to strengthen our balance sheet, while also giving us the flexibility to capitalize on attractive acquisition opportunities, which will further diversify the portfolio. Importantly, we believe we'll be able to move quickly if there is an opportunity that make sense.

While the current Houston investment sales market remains slow, we saw strong demand with a high-quality roster of firms interested in participating in the Greenway joint venture. And while the debt market remains difficult to access in Houston, we did have several options for debt as part of this transaction. It appears that the capital is again selectively looking for opportunities in Houston.

I'll now turn the call over to Jayson Lipsey to give an update on operation.

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Jayson Lipsey, Parkway Inc - EVP & COO [5]

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Thank you, Jason. We experienced slow leasing velocity across the portfolio during the fourth quarter, which was in line with broader Houston market trends. While we continue to witness healthy levels of interest from prospective tenants, the current market environment has lengthened the time it typically takes to execute a leasing transaction. Total leasing activity for the quarter included 58,000 square feet at an average net rate of $19.75 per square foot and at an average lease term of approximately 5.8 years.

We executed 30,000 square feet of renewal leases at an average net rate of $19.46 per square foot, representing a negative renewal spread of 4.3%. The roll down in rate is primarily attributed to a 11,000 square foot renewal at San Felipe Plaza, which had an expiring rate that was well above current market levels. But the renewal extended the lease for an additional 5.5 years of term at a rate that was in line (inaudible) and was only $4.80 per square foot in (inaudible) capital costs.

Our customer retention for the quarter was 50.6%. While this is a low retention percentage, we only had approximately 50,000 square feet expiring in the fourth quarter, so the move outs included in this calculation represent only a small percentage of our portfolio. Despite expectations that the leasing environment will continue to slow, we are still estimating a 7.2% positive mark-to-market that exists on expiring in-place rents. This was based on a conservative market rate estimate for our portfolio and assumes an approximately 26% discount in net rates from peak 2014 levels compared to most third-party research that has market rents down only a nominal amount during the corresponding period.

We also signed 26,000 square feet of new leases at an average net rate of $20.09 per square foot during the fourth quarter. The majority of new leasing activity during the quarter was related to a lease signed with a non oil and gas industry tenant at CityWestPlace IV, which helps partially backfill the 75,000 square feet vacancy that had previously been used to swing space for Statoil. Lastly, we completed 2,000 square feet of expansion leasing during the fourth quarter at an average net rate of $19.50 per square foot.

Turning to occupancy, as of year-end the portfolio was 85.8% occupied and 87.5% leased. We are introducing a 2017 year-end occupancy guidance range of 86% to 88%. As we discussed at our Investor Day, we expect to have move outs from two of our larger tenants totaling 156,000 square feet during 2017. This includes Lockton Companies 84,000 square foot lease at San Felipe Plaza and Hercules Offshores' 72,000 square foot lease at Greenway Plaza, both of which expire on December 31, 2017. Since our occupancy is reported as of the last day of the quarter, these two leases are included in our year-end occupancy guidance range. However, the loss of these two tenants will have a negative impact to our occupancy of approximately 180 basis points on January 1, 2018.

I'll now turn the call over to Scott to give an update on financial results.

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Scott Francis, Parkway Inc - EVP & CFO [6]

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Thank you, Jason. I first would like to note that our fourth quarter financial results include property level performance only for the 86 days following the Cousins transaction, which was completed on October 7, 2016.

We reported a net loss in the fourth quarter of $0.18 per basic and diluted share, and FFO per diluted share of $0.32. We incurred approximately $8.3 million in non-recurring expenses, primarily related to the completed merger and spin-off from Cousins as well as the Greenway joint venture. Excluding these expenses and other non-recurring items, our recurring FFO for the quarter was $0.48 per diluted share. We have provided a reconciliation of net loss to FFO and recurring FFO on page 10 of the supplemental report.

Our net debt plus preferred stock to adjusted EBITDA annualized multiple was 4.1 times as of December 31, 2016. Pro forma for the Greenway joint venture transaction and all associated financing activity, this multiple would be reduced to 2.5 times for the same time period. We have received a number of questions regarding the Company's dividend policy for common shareholders. At this time we do not expect that we will need to pay a dividend for calendar year 2016. We have also not yet declared a dividend for 2017, but as we have stated previously we expect to implement a dividend policy that initially will be based on the minimal amount required to maintain our REIT status, which is 90% of our taxable income. We also announced in our press release regarding the Greenway joint venture that we anticipate recording an impairment loss of approximately $25 million in the first quarter of 2017 as a result of the transaction.

Please note that the legacy Cousins assets, including Greenway Plaza, were record on Parkway's books at their carryover basis and the Legacy Parkway assets were mark-to-market at the merger closing date. The impairment calculation is based on the carryover basis of Greenway Plaza as compared to the implied valuation of the assets resulting from the joint venture.

Turning to guidance, we are introducing our full-year 2017 net loss range of negative $0.95 to negative $0.85 per share, a full-year FFO range of $1.34 to $1.44 per share and a full-year recurring FFO range of $1.49 to a $1.59 per share. We have also provided guidance ranges for the underlying assumptions related to our 2017 net loss and FFO outlook in our earnings release.

Please note that the underlying ranges are all based on Parkway's pro rata share and assume that the pending Greenway joint venture closes in early April and will be accounted for as an unconsolidated joint venture. Any changes in the timing of the closing could significantly impact these ranges where we have taken a conservative approach by basing our guidance on the earliest possible date of closing.

The underlying guidance ranges include cash net operating income of $97 million to $104 million, straight line rent and amortization of above and below market rents of $16 million to $19 million, after-tax management fee net income of negative $1 million to zero, total G&A expense of $12 million to $15 million, which includes non-cash share-based compensation expense of $1.8 million to $2.2 million, interest and other income of $500,000 to $1.5 million, interest expense and loan cost amortization of $32.5 million to $36.5 million, which includes loan cost amortization of $500,000 to $1.5 million, amortization of mortgage interest premium of $2.5 million to $3.0 million, and an expected loss on extinguishment of debt of $7.50 million to $7.75 million related to expensing the unamortized loan costs tied to the expected termination of our term-loan facility at the closing of the joint venture, and recurring capital expenditures of $70 million to $80 million.

As Jason mentioned earlier, we are also providing a year-end occupancy range of 86% to 88% and we are estimating a weighted average annual diluted common shares in units of 50.3 million. These assumptions do not include any future investment activity other than the pending Greenway joint venture. We have assumed the prepayment of our $350 million term loan facility in connection with the joint venture as well as the placement of the new $465 million mortgage loan on Greenway Plaza and the joint ventures assumption of the Phoenix Tower loan with no other capital markets activities included. As always, we will provide updates to these ranges throughout the year if there are any company events or activities that will significantly change our projections.

This concludes our prepared remarks. We will now open the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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Thank you. We will now begin the question-and-answer session. (Operator Instructions).

Dave Rodgers, Baird.

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Dave Rodgers, Baird - Analyst [2]

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Good morning, guys. Maybe Jim or Jason Bates, if you could, a little bit more on the joint venture or just talk a little bit about the process and the demand that you saw. And I guess given the demand that you did see, how do you contemplate maybe going forward with purchases. Would you purchase more assets in the joint venture or was this purely a monetization? Thanks.

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Jason Bates, Parkway Inc - EVP & CIO [3]

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I think that a couple of things. We were pleased in terms of the amount of interested parties in the process. That exceeded our expectations for sure. I think one of the reasons that we chose to do kind of the JV with two parties of extremely well capitalized that they would like to do more JVs with us on a going forward basis, we have the option. If we choose to do something wholly-owned, then we can do that on our own. And we would evaluate each one of those situations if they come up. If we were looking to do a JV, we would have to offer to them first. So I think from our standpoint it gave us a number of different options from a capital source going forward, Dave.

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Dave Rodgers, Baird - Analyst [4]

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Okay, good that's helpful. And I guess maybe Jayson Lipsey on the rental side. You did talk about a positive mark-to-market, I think it's 7.2%. But how does that look in the near term with the big roles that you have coming with 2017 expirations, how do you kind of look at that role maybe more nearer term as opposed to overall?

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Jayson Lipsey, Parkway Inc - EVP & COO [5]

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So I think that as we said about a month ago in our Investor Day, Dave, we expect for our mark-to-market to still come under pressure as we think that the acceleration of leasing activity hastens the decline in rents in Houston. And so we think that that will continue to come under pressure. Relative to our 2017 expiration specifically, those are under market rents so they're about $17.85 in place for a market of sort of $20 and those associated deals. So as those expire, that will naturally sort of bring down that positive mark-to-market when they come out of our rents.

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Dave Rodgers, Baird - Analyst [6]

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And then maybe lastly overall two questions on lease economics and I'll turn over. First the 4.3% roll down that you quoted at San Felipe was that GAAP or cash? And then I guess the second is, when you look at leasing costs, either net rent that you're quoting or the leasing cost on a per square foot basis, are you including free rent and can you kind of give us a sense of where free rent and overall economics in the market are?

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Jayson Lipsey, Parkway Inc - EVP & COO [7]

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Yes, the 4.3% negative mark for the fourth quarter was on a cash basis. And as you know when we report leasing stats, we basically report the starting spot rent after any kind of free rent. So our leasing stats don't include free rent. To give you some real time color on what we're seeing, I think that for a typical deal in Houston we're at probably at least a month of free rent per year of lease term. So on a seven-year deal, you'd see seven months of free rent most likely outside the lease term. I think on a ten-year deal, it would probably stretch to about a year of free rent outside the term and that's gross free rent. So we're abating OpEx as well as net rental rate.

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Dave Rodgers, Baird - Analyst [8]

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Okay, great. Thanks guys.

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Operator [9]

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Alexander Goldfarb, Sandler O'Neill.

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Alexander Goldfarb, Sandler O'Neill - Analyst [10]

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Good Morning. Let me just follow-up on the leasing. You commented where you -- at the bottom line you expect rents to be under pressure for some time. But as we think about the leasing costs, whether it's free rent, TI, any of the fund stuffs, where do you expect that to trend over the next year or two. Do you expect the aggregate leasing cost between TIs and free rent to double to get 50% more expensive or you think that it's sort of at a number where it's going to sit and merely we're going to see the impact on the state's rent side?

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Jayson Lipsey, Parkway Inc - EVP & COO [11]

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Yes, I had this exact conversation with our leasing team yesterday just to make sure that I had kind of the latest and greatest going into the call and I think what we're seeing is a general flattening of concessions outside of net rents. So we feel like based on the activity we've seen recently that free rent concessions, TIs those things seem to have flattened certainly in the last couple of months. So my expectation is that if you're looking at it on a kind of aggregate net effective rental rate basis, any further deterioration will likely come from the net rents and not necessarily from increased concessions.

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Alexander Goldfarb, Sandler O'Neill - Analyst [12]

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Okay. And then on the dividend side sort of I guess rough numbers, I think before we had an estimate of sort of $0.44 based on where we saw your earnings were going to be, obviously with the JV of Greenway that comes down. Is that $0.30 number sort of something that's reasonable on a full-year basis or how can you provide some help in determining what your payout could be?

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Scott Francis, Parkway Inc - EVP & CFO [13]

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Hi, Alex, this is Scott. I think we've said all along and we disclosed in the Form 10 that our dividend policy will be set based on our projected taxable income for the year and it is to maintain our re-status. And so I think we're going to continue with that and it will be a Board level decision, which we haven't determined at this point.

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Jim Heistand, Parkway Inc. - President & CEO [14]

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But Alex I will say, I mean, our preliminary view, yes, there will be a dividend being paid in 2017. We just haven't come to the conclusion. We have our Board meeting next week. So we'll be -- at that point, we'll be able to announce that pretty quickly.

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Alexander Goldfarb, Sandler O'Neill - Analyst [15]

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Okay, and then just finally you guys now have between Greenway when that closes and the cash at year-end, you'll have in excess of $500 million of cash. You guys have spoken before, Jim, at the Investor Day you spoke about your patients in sitting on cash waiting to buy assets. But obviously there is also the potential to do stock buybacks. As you guys think about your growth capital, clearly issuing common equity is an attractive given the discount that Greenway gave you ability to issue it basically at NAV. So is your view adamantly sit on the cash, wait for acquisitions, or do you think there could be a scenario where if you don't see any acquisitions that you like in the market, we may see you guys use capital to buy stock back?

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Scott Francis, Parkway Inc - EVP & CFO [16]

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Well, I think, listen, we think about it every day what's going to create the most value. So obviously it could be a function of where we're trading as it compared to a function of the opportunities that we see out there, Alex. I think we're monitoring it on a regular basis, and I think you guys should know, if you recall, [in fact I talked] quite a bit of heat back in 2012, we bought the first tower in Charlotte for -- at the time everybody was concerned that maybe we are buying this stock early. Our view is we're tracking it every day. If we find opportunities that will create more value, then given the ability to buy back our stock at an appropriate discount, we'll look at that each way. As we sit here right now, we've not made any decision on either one of those directions, but we are looking at each of those options daily.

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Alexander Goldfarb, Sandler O'Neill - Analyst [17]

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Okay, thank you.

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Operator [18]

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(Operator Instructions) (Inaudible)

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Unidentified Participant [19]

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Thank you. Jim you came out of the box guns blazing congratulations.

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Jim Heistand, Parkway Inc. - President & CEO [20]

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We were eight minutes late in our call and we think our guns blazing but thank you.

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Unidentified Participant [21]

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You may have already addressed this and it just went in one year and out the other but how wide ranging is you're hunting license? Are you a Houston-only REIT or are there other places in the country you're allowed to venture?

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Jim Heistand, Parkway Inc. - President & CEO [22]

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John, I think we've mentioned this before, I mean there is no covenants or restructurings that says we can't go somewhere else to investment if we can find value. With that said, Parkway with the nine markets and we were getting the reflection of the full-value for what the assets worth here in Houston. So as we're sitting here in the nearer term, I can tell you this, in 2017 things that we would look at would be only in Houston right now. The world can change, things could happen but as we sit here, that's one of the primary opportunities for dislocation. We obviously think at some point the market will return. And so if we can find good quality real estate undervalued at that point and as we said before, we should know before anybody else when we're beginning to see signs of the market improving. So it's our job to be ahead of that curve. And so as we sit here today I would tell you that our only thought process in terms of looking at investments is in Houston.

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Unidentified Participant [23]

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Okay. And then Jason, looking at page seven, the only big tenant that's above market that's actually even of substance above market is Stewart Title at $26 [of REIT] any of the tenants that renew or expire in the next three years. Is that a $26 a big number for the Post Oak asset?

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Jason Bates, Parkway Inc - EVP & CIO [24]

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I think that's above market rent today, John. My best guess of where we would perpetually strike deals in Post Oak today is probably in the lower $20s. So they're probably a couple of dollars above market. The question is, where will their rent be when their lease expires in 2019. And our expectation is that it may not be that far above market in 2019.

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Unidentified Participant [25]

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And then, last question, you guys have a remarkable consistency that market rents are about $20 net in all of your assets. If you had the same assets in Downtown Houston or weigh out the Energy Corridor, are those $25 net rents or $10 net rents? What is the current net rents in other major submarkets within Houston?

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Jason Bates, Parkway Inc - EVP & CIO [26]

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I think as we discussed back in January, John, price discovery is one of the most challenging things to do in Houston today. And the reason is that because on the level of transaction volume we're seeing in the city right now, there are just not enough deals to set a market bottom. And so in essence what you're getting is your landlords doing deals that really just (inaudible) most. So there are lot of fishing expeditions, if you will, going on in the market today, where people are just trying to figure out how low someone might go. I think that as the transaction volume increases, and we're starting to see it, you're going to see a firm bottom establish and you're also going to have better pricing discovery. So in essence what's happening is I think that there is not as much pricing differentiation among submarkets as there ought to be in Houston today and as there will be probably in the next six months. So typically in our portfolio there is a lot more pricing differentiation than what we're indicating just because this is where we're seeing actual deals happen today. My guess is that, within our portfolio what you'll see is assets like CityWestPlace will have the greatest rent growth potential relative to where [the market] today. Certainly I think there are assets within Greenway that have significant positive growth potential and we expect that that will happen, it's just going to take some more leasing velocity to really firm up the market.

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Unidentified Participant [27]

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Great, thank you.

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Operator [28]

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Tom Lesnick, Capital One.

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Tom Lesnick, Capital One. - Analyst [29]

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Good morning, guys. I guess first turning back to Greenway for a second, I think you mentioned an 8.1% cash cap rate. What was the GAAP yield on that? And what is the dollar amount of the NOI impact on 2017 that gets you to your guidance range? In other words, what would NOI guidance be if Greenway wasn't excluded?

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Jason Bates, Parkway Inc - EVP & CIO [30]

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Tom, this is Jason, maybe we can try to break that up and try to get you where you're headed there. So the 8.1% cash cap rate would be from a buyers perspective. So with sort of the free rent credit added back into their NOI, if you will, on a GAAP basis I don't know that that's something that we can break down as easily for you or maybe that's something we can take that offline. Is it related to sort of the NOI that in the dilution associated with that based off the sale, we got a gross price of about $512 million at an 8% cash cap rate to approximately $40 million of full-year NOI dilution.

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Tom Lesnick, Capital One. - Analyst [31]

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Okay, and in timing wise you said that was early second quarter?

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Jason Bates, Parkway Inc - EVP & CIO [32]

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Yes. So we're assuming approximately three quarters coming out here for 2017.

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Tom Lesnick, Capital One. - Analyst [33]

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Okay, perfect. And just in terms of accounting for the JV with 51% control, is that considered consolidated or unconsolidated from the accounting perspectives?

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Scott Francis, Parkway Inc - EVP & CFO [34]

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Hey, Tom, this is Scott. It will be an unconsolidated joint venture. You may recall the accounting guidance on unconsolidated joint ventures changed I think within the last year. Yield presumption was that the general (inaudible) to control and so there has been a greater emphasis placed on the limited partners participating versus protective rights. And after analyzing the major decisions, we've concluded that the limited partners have substantial participating rights and therefore will be treated unconsolidated joint venture for GAAP purposes.

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Jason Bates, Parkway Inc - EVP & CIO [35]

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Yes, Tom. I mean this JV is consistent with any other JVs you probably would do over the last 10, 20 years. We have day-to-day operating control of the property, but any kind of major decisions, sale of the assets, refinance of the assets, always has partner participation in that. And the accounting changes suggest that because of that we have pursued on unconsolidated basis. But it's not that the JV was structured differently than you would normally do in a JV of this nature.

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Tom Lesnick, Capital One. - Analyst [36]

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Okay, got it. That's very helpful. And then turning over to leasing, obviously you're baking in significant leasing CapEx in guidance. Just wondering how much of that is contractually obligated for the leases already assigned and how much new leasing does that assume in your guidance?

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Jason Bates, Parkway Inc - EVP & CIO [37]

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Yes, and that's a good question. Let me sort of breakdown the CapEx guidance a little bit. Of the sort of $70 million to $80 million of CapEx guidance, about let's call it $45 million to $50 million of that is TI and leasing commissions. And of that $45 million to $50 million, about $22 million is carryover TI and leasing commissions. So that's on deals that were either shot prior to the merger or 2016 capital that just hasn't gotten spent.

There is about $30 million or so of back of the house capital and more importantly value enhancing front of the house repositioning capital. And none of that in our view is recurring in nature, because that's something we intent to spend to really enhance the value of the marketability and the appeal of the assets which we think creates tremendous opportunity for us to create value. So I think it's probably a larger-than-expected guidance range but there is a large component of it that's not recurring CapEx and we would not advice as a run rate.

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Tom Lesnick, Capital One. - Analyst [38]

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Got it. That's very helpful. So I guess, following on that, it looks like year-end occupancy guidance assumes roughly 120 basis points of improvement at the midpoint by year-end and then you mentioned the two tenants moving out on January 1, 2018 with about 180 basis points of impact there. Is it fair to say that with the leasing assumptions that you've made for 2017 that we could potentially see NOI growth in 2018.

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Jason Bates, Parkway Inc - EVP & CIO [39]

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I don't think that's an unreasonable expectation, Tom. I mean clearly it's harder to predict in these times because there is just greater variability associated with the market. But our expectation is that in 2017 we'll get leasing traction. We don't expect for that to have a tremendous impact on NOI in 2017, but hopefully those leases as they kick in, especially as free rent burns off in 2018, we'll have a positive impact on NOI.

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Scott Francis, Parkway Inc - EVP & CFO [40]

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Tom, I mean, listen we're a new company, 100% in Houston. As you can imagine, we are very cautious in terms of our approach to where things will go and so coming out of here suggesting that we're going to do a bunch of leasing, we hope we do, but our view of the market as we told you before is it's still soft and probably will get softer before it gets better.

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Tom Lesnick, Capital One. - Analyst [41]

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Alright, that's fair. I appreciate that. I guess last one from me, today have you guys made any progress on plans for the capital expenditure at Post Oak and how should we be thinking about the timing of that expenditure going forward?

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Jason Bates, Parkway Inc - EVP & CIO [42]

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I think our strategy at Greenway and Post Oak is different. So Greenway, our goal was to sort of hit the ground running as fast as possible with as many transformative projects as we could. And I think that's we're positioned to do and we're already starting to deploy many of those repositioning projects. At Post Oak Central, our strategy has been to take a little bit more of a patient approach as we work with our large customers, Apache and Stewart, to figure out what their long-term needs are. So I think what you'll see from us in the near-term at Post Oak Central is we're going to start deploying repositioning capital that doesn't have variability around those big moving parts. So we've got a couple of lobby renovations, common corridors, restaurants and things like that planned for this year. And I think we're trying to be as patients as possible we can around more major transformative repositioning projects once we have better clarity around the outcome of those two large leases.

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Tom Lesnick, Capital One. - Analyst [43]

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That's helpful. And then just to clarify, other income, that was a little elevated in the quarter. Was that due to potential land sale there?

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Jason Bates, Parkway Inc - EVP & CIO [44]

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There was an (inaudible) main proceeding that Cousins had worked with Harris County Taxing Authority. It was about a quarter acres delivered at Post Oak and so they recognized about $1.1 million gain in connection with that and because that's a non-depreciable asset, it was not excluded from FFO.

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Tom Lesnick, Capital One. - Analyst [45]

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Okay, thanks guys. I'll hop back in the queue.

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Operator [46]

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Rich Anderson, Mizuho Securities.

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Rich Anderson, Mizuho Securities - Analyst [47]

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Hey, thanks, good morning. So, I just want to kind of put a few things on the record. Rig counts are up from 400 to 700, oil above $50 a barrel, above breakeven, now, oil production per day is just $400,000 a barrel, still [400,000] barrels per day below peak, general health and other areas of commercial real estate like Houston, I mean like industrial in Houston, and then you have the former CEO of ExxonMobil as the secretary of State. So there is a couple of things that kind of lineup here about Houston that are couldn't arguably work in favor of it long-term or even in the intermediate term. You guys are coming out of the gate with a conservative under telling that makes perfect sense. But do you feel like that there is any percolating positivity out there from clients or potential clients that are starting to even assess some of these things into their long-term plan or are there intermediate term plan?

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Jim Heistand, Parkway Inc. - President & CEO [48]

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Yes, Rich, I think, well, first of all we feel much better where the market sits today both in oil and the direction of the economy than we did when we contemplated the spin back seven, eight, nine months ago. So generally things are better. There are more from a perception standpoint. What we haven't seen yet is the oil companies who've subleased a bunch of the space begin to take that back and so I think in a given -- let's face it, the run up hasn't been for over a long period of time, I think that if things continue to stay stable, [not necessarily] have to go up that much but continue to stay stable through the recourse of this year then we might get lucky and things will get come back sooner than what we originally anticipated, because the environment is substantially better now than when we first contemplated doing this merger. So timing could work in our favor, if things continue to stay as they are, and we all know [unless] we don't know the certainty around that yet.

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Jason Bates, Parkway Inc - EVP & CIO [49]

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Rich, I think everything you mentioned are important leading indicators. Challenge is that we're still over 20% total availability in the city of Houston today, the 20-year high for the city. And while everything seems to be moving in a promising direction, energy prices are going to have to be at a sustained number that not only enable profitability again, but also capital spending. And so what we've not yet seen is any sort of real pushing of the accelerator to spend a lot of capital by energy companies which will ultimately lead the hiring in the net absorption. And so that sort of what we're watching for.

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Rich Anderson, Mizuho Securities - Analyst [50]

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Okay, fair enough. And then do you guys have sort of a -- I'm sure you have an internal NAV of some sort but, and Jim you've always been very open book about the clearest path shareholder value could be either selling or operating on your own watch. But to what degree do you have kind of a number in mind, even at this point or is it there is just too much value to be created for now for you guys to do before you even kind of even consider that path.

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Jim Heistand, Parkway Inc. - President & CEO [51]

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We certainly aren't sitting here contemplating running a process with a company or anything like that at that point in time. With that said, we do have a view of NAV. We review that every quarter. It's ongoing and to the extent there was an opportunity to monetize that without the risk that the environment holds and we consider that as well too. I've never changed in that viewpoint. But as we're sitting here today, our focus is we think there is value that we can create in the assets we own, which is as we said before, that's kind of our Number 1 priority right now and that is our Number 1 priority versus buying additional assets. So the repositioning that Jason mentioned going on in Greenway which our new partners have been fully supportive of, we think we'll continue to add value in that asset. So as we review our NAV and hopefully that NAV goes higher over time, the market continues to improve, we'll evaluate at that, but I think as you and I've discussed it unlike some others that's always an option for us.

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Rich Anderson, Mizuho Securities - Analyst [52]

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I appreciate it and we would love to see a stick around anyway to fight through this and see the process unfold. So anyway thanks for the frank responses.

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Jim Heistand, Parkway Inc. - President & CEO [53]

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I appreciate it.

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Operator [54]

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There are no further questions. So this will conclude our question-and-answer session. I would now like to turn the conference back over to Jim Heistand for any closing remarks.

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Jim Heistand, Parkway Inc. - President & CEO [55]

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Well, first of all, I apologize for starting 10 minutes late. We had technical difficulties and as most of you know that's not my expertise but we relate and apologize for making you all wait. Also I just wanted to thank you for all the -- we had a very good attendance for the Investor Day in January, people came up to Houston, so we appreciated that. It was good for us and I think it was additive everybody came out. So I look forward to seeing everybody soon. And thank you for joining us on the call today.

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Operator [56]

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The call which is now concluded. Thank you all for attending today's presentation. You may now disconnect.